The state is something common, administered by someone private in the common interest… This common, for those who watch over it, eventually becomes something of their own, private – if they watch over too long or if they know that every time they will be chosen to watch over it.
This is where the eternal desire of the state, or rather of those who look after the common, to subordinate the others to its own interests, so as never to lose the common as a resource for its own well-being, begins. Omitting the topic of how to limit such intentions and opportunities themselves, let us try to understand how such opportunities are created and what they lead to.
The problem of freedom, the market, the state and society can be viewed through different prisms and in different paradigms. In this case, I will proceed from the simplest economic relationship – the price of money and inflation, described in particular by Irving Fisher.
Fisher’s classical equation is as follows:
Real Market Rate of Credit ( R ) + Inflation of Goods and Tangible Goods (I)= Nominal Rate of Government Credit (N). That is to say
R + I = N
The exact formula from which the above simplification flows would be as follows:
N = ((1+R/100) * (1+I/100) – 1) *100
R = ((1+N/100) / (1+I/100) – 1) *100
In this formula, we convert the percentages to one and then convert the result back to percent. However, for the sake of clarity, a simplified model will be used below:
The nominal logic in this model corresponds to the free market paradigm, in particular the concept of AD/AS. Here the real rate and inflation are market values formed by endogenous market factors and reflecting the balance of supply and demand in the market.
Inflation is the value of the dynamics of changes in the prices of goods – commodities – under the influence of the changing balance of supply and demand for these goods: either the demand is more or the supply is less.
The real rate of credit is the market value, i.e., the real price that agents are willing to pay for the use of other agents’ money, such as borrowers-consumers to banks-lenders. It also depends on the demand for money. For banks, respectively, this is the investment return on credit as an investment asset, and for borrowers, the cost of using credit.
The nominal rate is the price for the use of money, which is issued by the state, as the central and primary emitter, for the exchange of goods and the creation of new goods. This price depends on the values of the two market variables and their sum, because it reflects the market economy’s need for money.
Both market variables – inflation and the real market rate – depend on each other.
According to the model considered in the free market logic, inflation for goods rises when there is more money than goods, that is, the demand for money is satisfied and there is no demand for goods. Then the following rule would be relevant for a rising inflation rate:
I>Ipr = PQ<MV,
Accordingly, for the real rate indicator of rising inflation will be relevant:
R<Rpr = MV>PQ,
is the actual value of inflation,
Ipr – the previous value of inflation,
R – market (real) rate on the loan,
Rpr – the previous rate on the loan,
Recall that MV = PQ is Fisher’s quantitative exchange equilibrium, where
M is the amount of money (money supply)
V – velocity of money supply
Q – quantity of goods (volume of goods production)
P – prices of goods
This rule is valid until the moment when the goods become too expensive, then the demand for goods falls and there is a demand for money, the price of goods falls, and the price of money increases.
Then the rule for declining inflation would be:
I<Ipr = MV<PQ,
Correspondingly, for an increasing real rate.
In other words, inflation – the price of goods – rises when the balance of money-commodities is in favor of money, and there are not enough goods. The price of money – the real rate – rises when the balance of money-commodities is in favor of goods and there is not enough money.
That is to say
MV>PQ = I>Ipr,
R<Rpr = MV>PQ.
Consequently, the price of goods increases as long as the amount of goods reaches a surplus or their price becomes too high to buy. The market is in balance, i.e.
Then the reverse process begins – goods are bought less because they are no longer needed in such volume or because they become too expensive. Prices for goods begin to fall – there are a lot of them or they are too expensive – and money begins to rise – they are needed to pay for more expensive goods or for goods for which demand is not met.
Accordingly, inflation falls, and the real rate rises, i.e.
I<Ipr = MV<PQ,
The nominal rate N for the Fisher equation in this paradigm is a consequence of market exchange, not its determinant. The value of the N rate reflects the balance of demand for money and goods, that is, the actual state of the economy, rather than determining it.
Inflation rises, and the real rate is at a low level when the demand for goods outstrips the demand for money, which means that there are fewer goods than money. At some point, the growth in demand for goods slows down, and the balance gradually evens out: the demand for money begins to rise and the demand for goods decreases, which means inflation slows down and the real rate begins to rise.
Then comes a situation when the prices of goods fall and the demand for money rises, which means disinflation or deflation and a rise in the real rate. The state, in the free market paradigm, must respond to market signals by reflecting the real market rate and the rate of inflation and filling the economy with exactly the amount of money it needs to move toward equilibrium – by setting an appropriate nominal rate.
For example, imagine the following situation. Inflation is 6 percent and the real rate is 4. Then the nominal rate will be 10. That is
R(4) + I(6) = N(10).
The rate at which the government lends to the banks is 10, because this reflects the existing equilibrium and does not distort the market — matching the price of money to the price of goods, depending on real supply and demand.
Then inflation rises to 8 percent – for example, by 2 points, because demand is great and there are fewer goods, so there is more money relative to them, and the market rate is still at 4.
That is to say
I>Ipr = R=<Rpr.
R(4) + I(6+2) = N(12).
The government lending rate should now be 12.
Then, the increased nominal rate increases the real rate – the market price of money, which evens the balance in favor of goods: money becomes more expensive, there is less of it, demand for it increases, the quantity of goods expands, demand for goods slows down.
Let us assume that the real rate has also increased by 2. Then
R(4+2) + I(8) = N(14).
If the nominal rate increases even more, the real rate will rise even more and decrease the amount of money, so the demand for goods decreases and their amount increases, which leads to lower prices. Then
R(6) + I(8-2) = N(12).
Now, the compressed nominal rate makes money cheaper, expanding its supply, and makes goods more expensive, the surplus of which was purchased at low prices in the previous cycle.
And so on, within the framework of nominal cycling and dynamic equilibria of the AD/AS model.
Of course, this example is a linear simplification excluding a large number of influencing factors and additional variables. In particular, the change in percentage points is taken as the same for all variables in step 2, although in reality the magnitudes of changes in inflation and real rates are not the same, have lags, etc. However, this simplified example clearly shows that the nominal rate is, in free market logic, a reactive consequentialist rather than a proactive endogenous determinant.
Thus, the rules of the free market paradigm for Fisher’s model are
R>Rpr + I<=Ipr = N, inflation slows or falls, market rate rises. PQ>MV
R<=Rpr + I>Ipr = N, inflation accelerates, rate slows or decreases. MV>PQ
The model interpreted in this way can be detailed to the following form:
R+I=N=R+I>Ip=N>Npr =(R>Rpr)+I=N>Npr=R+(I<Ipr)=N<Npr =(R<Rpr)+I=N<Npr
Regarding the above example, this is as follows:
4( R )+6(I)=10(N)=4+(6+2)=12=(4+2)+8=14=6+(8-2)=12=(6-2)+6=10
Now let’s look at how this happens in reality in modern dirigiste economics.
The main feature here is that the nominal rate is not a consequence of economic processes and does not reflect the state of the economy, but determines it. It is the nominal rate in a dirigist economy that determines the balance of demand for money and goods and is the proactive determinant of the state.
If inflation rises, i.e.
the state does not wait for the natural growth of the real market rate, that is, the market increase in the price of money due to a gradual reduction in the supply of money and increase the commodity filling or excessive appreciation of goods. The state raises in advance the nominal rate, that is, increase the price of credit for banks, which consequently increases the real rate and reduces the amount of money from banks to borrowers. As a result, productive activity falls, and demand for goods decreases. In reality, this leads to distortions such as overstocking or a premature contraction in production.
It is also the other way around. When
it means a high real rate and declining business and consumer activity, expressed in lower prices of goods and their wide supply. In this case, the government does not wait for the natural reduction of the real rate, that is, the market decline in the price of money due to a decrease in the demand for money and increase their supply, against the backdrop of decreasing supply of goods and increasing demand. The state lowers the nominal rate in advance – the price of credit for banks, naturally reducing the price of money for agents and making money more available. As a result, the demand for money decreases, its supply expands, and the demand for goods increases. This also leads to distortions, such as the acceleration of consumer demand outstripping supply possibilities. Another externality here is the over-expansion of production and, in general, of investment and business activity.
Actually, the very reversal of the logical sequence in Fisher’s formula by modern ruling Keynesianism is an existential problem, a problem of being, philosophical, ideological. This is the difference in the very approach to the economy, to the roles of the state and society in their coexistence, to the relations between society and the individual. Try to reflect on this topic yourself, and take Fisher’s formula as a starting point.
I am sure that, following formal logic, it is impossible to come to any other conclusion than the following. When the state forcefully – proactively determines the nominal rate to change market processes and dynamic equilibria, ostensibly to prevent problems or strengthen opportunities, rather than setting this rate as a catalyst reflecting market realities – the entire system is fatally and irreversibly distorted. Add to this the fact that by the state we mean, among other things, political entrepreneurs and their groups in power trying to extend or compete for their mandate. And this means that we are talking about simple socio-economic agents, that is, simple individuals with corresponding personal interests whose commonality is the maximization of individual benefits, both material and emotional.
All other ways of exogenously defining any components of a formula are the same harmful and pernicious aberration.
For example, the so-called neofisherianism in Turkey, where I = N – R, which means that in order to reduce inflation one must reduce the nominal rate, that is, the difference between the nominal rate and the real rate. In fact, here the causal relationship of the interdependence of the variables is distorted. In this case, the nominal rate N is also determined by the state.
Or in socialist and tyrannical dictatorships, where N=R=I. Here the market mechanism is essentially eliminated, and the values of all variables are somehow set by the state, in various sequences.
In advanced Keynesian economies, as described above, the nominal rate N is determinant for economic processes in the logic of R = N – I. It also allows the state to actually shape the market discourse it – or rather the ruling group – needs for a period of time. However, the distortions born of such interference in the balancing of supply and demand cause more and more crises and volatility of cycles, bought by the same state determinism.
Try applying this model and its causation to broader and more generalized social processes, to state-society interactions, where
N is the behavior of the state, which can be reactive-catalyzing or proactive-forcing,
R is the real social cost,
I is the dynamics of any social performance, from cultural to economic.
If N is not determinant but consequentialist, then the task of the state is to respond to the dynamics of equilibria, in other words, to conform to the role of arbitrator and watchdog, ensuring equal rights and security for all social agents. If N is determinant, then the state mediates and conditions the other two variables with different ends and in different configurations, subordinating society and individuals to its interests.
But we must always remember that no ideologemes or other sacred or highly spiritual values can be predominant in motivating the behavior of an individual as a biological being. Power and its aspirants are human beings, and every human being always and everywhere maximizes his benefits and minimizes his costs. Institutional constraints, ethical norms and corresponding social rhetoric in a developed democratic society with liberal institutions simply minimize the opportunities for the political entrepreneur to extend his benefits – the importance of the “human” becomes more important than the “animal,” according to Deirdre McСloskey’s model. Where ethics are archaic and the institutional system is not liberal, however, such opportunities for power have few limits, leading to authoritarianism and social primitivization.
The world today is a world of state N, from the United States and Western Europe to Russia and North Korea. A world in which the state, or rather the people in control of public resources, invades the limits of personal freedoms and the natural process of exchange of goods between free individuals, which is called the market.
Leviathan breaks the bonds, as Hobbes would say.